President Barack Obama’s nomination of Rep. Mel Watt, D-N.C., to replace Ed DeMarco at the Federal Housing Finance Agency comes at a time when, interestingly enough, shared-appreciation pilot program efforts are hitting Congress.
The FHFA director role reversals would put the regulator on course to rapid changes, specifically principal forgiveness, something Watt has publicly supported — and an initiative DeMarco is clearly opposed to.
Consequently, a little unknown bill — the Preserving American Homeownership Act of 2013 (H.R. 1754) — was introduced by lawmakers that would establish pilot programs to encourage the use of shared-appreciation mortgage modifications.
Current FHFA acting director Ed DeMarco has long said the current rules of conservatorship do not incorporate the type of aggressive steps a principal reduction program would entail. However, Congress has the power to reshape how the FHFA operates as conservator of the GSEs, and this very well be the first step to giving a new director these kinds of powers.
Rep. Gary Peters, D-MI, Rep. Dennis Ross, R-Fla., and Rep. Keith Ellison, D-MN, introduced the bill saying it would preserve the government-sponsored enterprises’ assets and reduce taxpayer losses — consistent with the mission of the Federal Housing Finance Agency as conservator of Fannie Mae and Freddie Mac, while still ushering in a more robust housing recovery.
"I am confident that, if confirmed, Rep. Watt will continue his support for common-sense policies to keep people in their homes," Rep. Ellison said. "Rep. Watt is a leading proponent principal reduction — allowing Fannie Mae and Freddie Mac to write down the mortgage principal owed by homeowners — which helps struggling families keep their homes."
The bill explains that the director of the FHFA and the Federal Housing Commissioner, in consultation with the Secretary of the U.S. Department of Treasury, will each establish a pilot program to encourage the use of shared appreciation mortgage modifications that are designed to return greater cash flow to investors through assistance provided under the Home Affordable Modification Program.
For all purposes of the pilot program, a shared appreciation mortgage modification shall reduce the loan-to-value ratio of a covered mortgage to 115% by immediately reducing the amount of principal under the covered mortgage accordingly, and to 95% within three years by reducing the amount of principal under the covered mortgage by one-third at the end of each year.
The pilot program will also reduce the interest rate for a covered mortgage as well as reduce the amount of any periodic payment required to be made by the homeowner.
Furthermore, the pilot program would require the homeowner to pay the investor after refinancing or selling the real property securing a covered mortgage a percentage of the amount of an increase — not to exceed 50% of such increase — in the value of the property during the period of when the homeowner was approved.
Watt and similar advocates of debt-forgiveness also received validation from the Congressional Budget Office, which found that a mortgage forgiveness program for distressed borrowers would reduce foreclosures, shrink the federal deficit and lift the economy.
The CBO examined scenarios to bring homeowners to 115%, 100% and 90% loan-to-value ratios, anticipating up to 95,000 homes could benefit from such a program.
Although Watt has received quite a bit of opposition, various policymakers from both sides of the aisle put out favorable statements on his nomination, including Sen. Elizabeth Warren, D-Mass., Sen. Richard Burr, R-N.C. and Democratic leader Nancy Pelosi, suggesting that Capitol Hill could favor a shared appreciation model.
"Having served with Mel, I know of his commitment to sustainable federal housing programs and am confident he will work hard to protect taxpayers from future exposure to Fannie Mae and Freddie Mac," Burr said. "I look forward to working with Rep. Watt in his new role to find new ways to facilitate more private sector involvement in the housing and mortgage markets."
On a similar note, Pelosi believes Watt will provide a moral compass to the operations and housing interests of the financial industry.
"Mel Watt has never failed to fight on behalf of homeowners facing foreclosures, and he worked with Members to pass tough federal anti-predatory lending legislation in Wall Street Reform to better protect underserved Americans who are looking for a home loan," she said.
Nonetheless, there are still market experts who believe Watt’s is singularly unqualified to be a regulatory for the enterprises.
"Mr. Watt has received generous donations from banks, unions and related donors, and will likely support principal reductions if the banks don’t’ pay for them, but taxpayers do," Anthony Sanders of George Mason University told HousingWire.
He added, "It’s a shame that President Obama wants to replace Ed DeMarco over his resistance to principal reductions. The only silver lining is that Mr. Watt’s donors will want to keep his principal reduction fantasies under control."